3.3 Management of Capital Invested in Assets 31On the other hand, the lessee is not the owner of the asset. The lessee cannot
sell the asset if it turns out to be surplus to requirements. The lessee is bound by
the agreed leasing period.
Neither is the lessee the buyer of the asset. Disputes regarding the quality of the
leased asset can be complicated because of the existence of two contracts (sale and
leasing) each with different contract parties.
Long duration. Many legal aspects relate to the long duration of financial
leases. The duration of financial leases can be long due to, for example, tax rea-
sons.
One of the key features of financial leasing is its tax treatment.^31 Tax benefits are, for leas-
ing companies, the primary motive behind cross-border financial leasing.^32 Taxation is out-
side the scope of this book.
The right to terminate the financial lease prematurely would help the firm to man-
age commercial risk. In aircraft leasing, a carrier may prefer to terminate aircraft
leasing contracts in an economic downturn in order to cut costs.^33
The firm should pay attention to whether, and at what cost, it can terminate the
contract prematurely. For example, the termination value of the object often de-
pends on who can be blamed for the termination.
The long duration of financial leases and the importance of the asset value at
the time of the expiry of the contract make it necessary for the lessor to ensure that
the value of the leased object is maintained during the lease period. The lessor will
therefore require a contract term under which the lessee has a duty to use the
leased object only in certain ways, maintain and repair it, obtain insurance, pay
property taxes, and so forth. Obligations designed to ensure that the value of the
leased object is maintained can increase costs for the lessee by, for example, mak-
ing it more difficult to use and maintain the leased object in an optimal way.^34 The
firm (lessee) can mitigate this risk in two main ways. The firm can ensure that it
has enough discretion to decide on the use and maintenance of the leased object.
In addition, the firm can own core assets, ensure that not all core assets are leased,
and ensure that all leased assets are not leased from the same lessor.^35
Termination clause. The long-term nature of financial leasing is reflected in the
termination clause. The parties typically agree that neither party is free to termi-
nate the contract before the expiry of the lease term. As the lessee cannot freely re-
turn the leased asset to the lessor, the lessee bears the commercial risk inherent in
investment in the leased asset.
(^31) See, for example, §§ 39(1) and § 39(2) of the German Abgabenordnung (AO).
(^32) Frick J, op cit, p 245: “Die Grundidee liegt also darin, dass mit dem Eigentum an Inves-
titionsgütern verbundene Steuervorteile ausländischen Kapitalgebern zur Verfügung
gestellt werden, welche bereit sind, resultierende Steuervorteile (Investment Tax Credits
und grosszügige Abschreibungen) mit der inländischen Partei (Eigentümer oder sonsti-
ger Nutzungsberechtigter) zu teilen und tiefe Leasingraten zu bieten.”
(^33) Ibid, p 246.
(^34) Ibid, p 247.
(^35) Ibid, p 247.